Hello Friends, I hope all is well with you! We are back to primetime blogging with another interesting topic – debt. Mr. Nahas, what is debt? Great question! That is what I will be answering for you today. Debt is how you buy things that you don’t have the full amount for. If a house is $200,000 and you don’t have that amount, you will have to take a loan out in order to purchase the home.
Debt is something that is owed or due, usually money; there are usually two parties involved, the debtor and the creditor. The creditor is the one lending you money or whatever you agreed upon, and the debtor is the one that receives the money or whatever you agreed upon. The debtor must repay the creditor the original amount plus interest. The time frame must be agreed upon by the creditor and the debtor; it can be 30 minutes, 30 days, 30 weeks, 30 months, 30 years, or whatever is agreed upon.
Debt usually has these attributes:
It’s also important to note that there is no major difference between a loan and debt; they are usually used interchangeably but both need to be paid off regardless. Additionally, the attributes above are not an exhaustive list, each loan has its own attributes and details that need to be considered. There are two main overall types of debt – secured and unsecured.
Secured debt is debt that is backed by collateral. What this means is that you (the debtor) pledge some asset, usually physical, in exchange for the loan. I think an example would help clarify it. For example, let’s say that you want to buy a house, you would need to go to the bank to get approved for a loan. In the terms of the loan, they will specify that the house you want to purchase will be the collateral so, in the event that you default on your house payment, the bank has the right to take away the home. This type of loan is less risky for the bank because there is a physical asset securing the loan; they can take your home if you fail to pay back the loan.
There are two main types of secured debt:
This type of debt is the opposite of secured debt. There is no collateral that is tied to the loan. This makes the loan riskier for the creditor as they cannot go after the collateral since there is none. The interest rate is higher on these types of debt to account for the risk that the creditor is taking by issuing you the loan.
The main types of unsecured debt are:
I think it would be worth while to put some statistics on debt. I researched this data from the Federal Reserve’s website. All of this data is for 2020Q1 (Total of four quarters per year, Q1: Jan – Mar, Q2: May-June, Q3: July-Sep, Q4; Oct-Dec).
The debt numbers are scary. We are constantly reaching new all-time highs for household debt. People are borrowing and spending money they don’t have at an all-time high. The following numbers and visual were obtained from the Federal Reserve’s website.
|Mortgage Debt||$9.71 trillion|
|Home Equity Line of Credit||$0.39 trillion|
|Student Loan Debt||$1.54 trillion|
|Auto Debt||$1.35 trillion|
|Credit Card Debt||$0.39 trillion|
|Other Debt||$0.43 trillion|
|Total Household Debt||$14.3 trillion|
I hope that I provided you all with useful information on what debt is and the different types of debt. Playing with debt is a dangerous game, it has the possibility to destroy your livelihood if you use it irresponsibly but if you learn how to use it the right way, it offers you the chance to invest in some assets that can build you wealth. Be smart about debt and don’t let it destroy your wealth. If you have any questions or need me to clarify anything, post a comment and I will reach out to you as soon as I can. Thank you, friends, for stopping by! Take care and see you soon!
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